Good Times About to Roll

[wilmawatts]

The good times are about to roll in the energy sector. Merrill Lynch's note from last week notes in part:

Positioning for the oil rally
Merrill Lynch
August 16, 2016

Our commodity strategists estimate that most of the sell-off in oil prices is behind us as they look for WTI oil prices to rally to $54/bbl (+18%) by the end of the year and $69/bbl (+51%) by next June. Oil production continues to fall as global oil & gas investment has been cut by nearly $300bn (41%) and rig counts have dropped by 37% since the 2014 peak. In contrast, low oil prices continue to drive healthy demand growth, putting the oil market on pace to see its biggest supply-demand deficit since 2011. Our commodities team estimates that the deficit will last through 2020. Given this outlook, we expect the energy sector to outperform the S&P 500 and move the sector to overweight from Marketweight.

Historically, when oil has rallied over 25%, Energy has outperformed the market nearly 90% of the time, with average outperformance of 11ppt. The one time that the sector underperformed significantly amid a strong oil rally was when the stock market troughed in 2009, but the sector did recoup most of that underperformance in the subsequent year. . . .

. . . This underperformance pushed Energy’s weight in the S&P 500 below 7%, roughly half the level of its 1990 and 2008 peaks of 13%+ and at levels not seen since the Tech bubble, when its weight had dropped to 5.5%. There has never been a time when the Energy sector’s weight has dropped below 7% and the sector did not outperform the market over the subsequent three years.

[wilmawatts]

I think Dan has a copy of the report if you want to read it, if not I will send it to Sabrina

[dan_s]

Sabrina's e-mail is energyprospectus@gmail.com